Can You Roll an Annuity Into a Roth IRA: Taxes and Surrender Charges

You can roll an annuity into a Roth IRA only if it is a qualified annuity, meaning one held inside a traditional IRA, 401(k), 403(b), SEP IRA, or similar tax-deferred retirement plan. The full amount you convert gets added to your ordinary income for the year you make the move. A non-qualified annuity you bought on your own with after-tax dollars cannot be converted into a Roth IRA by any direct route.

Which Annuities Can Actually Be Converted

The type of annuity contract — fixed, variable, or indexed — does not decide eligibility. What matters is where the annuity sits.

A qualified annuity lives inside a traditional IRA, SEP IRA, 401(k), 403(b), or a similar employer-sponsored plan. The contributions went in pre-tax, so the IRS treats the contract the same as any other asset in that plan. You can convert all or part of it to a Roth IRA, and the amount you convert is added to your gross income for the year. The IRS allows rollovers from eligible retirement plans into Roth IRAs, with the understanding that you pick up the tax bill on the way in.¹

A non-qualified annuity is one you bought outside any retirement plan with money you had already paid tax on. It cannot be rolled into a Roth IRA. A Section 1035 exchange lets you swap one non-qualified annuity for another annuity or a long-term care policy tax-free, but it does not reach IRAs. Your only workaround is to surrender the contract, pay ordinary income tax on the earnings, and then make a regular Roth IRA contribution with the proceeds — a contribution capped by the annual Roth limit and phased out at higher incomes, which is nothing like a conversion in scale.

If you are not sure which category your contract falls into, the original paperwork will identify whether it was established under an IRA or another qualified plan. The insurance company can confirm the plan type by phone.

What the Conversion Will Cost You in Tax

The IRS treats a Roth conversion as a taxable event. Every dollar you move from the qualified annuity to the Roth IRA is added to your ordinary income for that year.² Federal income tax rates run from 10% to 37%, so a large conversion can push part of the money into a higher bracket than your salary alone would occupy.³ Many people spread conversions over several years to keep more of the money in lower brackets.

Unlike regular Roth contributions, conversions have no income ceiling and no dollar cap. Someone earning $500,000 can convert a $300,000 annuity in a single transaction; the statute excludes qualified rollover contributions from the annual limit.² That is the whole appeal of the strategy for larger balances.

Pay the tax from a separate bank account rather than pulling it from the conversion. Every dollar that lands inside the Roth grows tax-free from that point forward, so using retirement funds to cover the bill shrinks the base that benefits from that growth.

The Pro-Rata Rule

If you own multiple traditional IRAs and some contain a mix of deductible and nondeductible contributions, you cannot cherry-pick the after-tax dollars to convert. Each conversion is treated as coming proportionally from the taxable and nontaxable portions of all your traditional, SEP, and SIMPLE IRA balances combined, measured as of December 31 of the conversion year. The math is reported on IRS Form 8606.⁴

If your total traditional IRA balances equal $100,000 and $20,000 of that is nondeductible, 20% of any conversion is tax-free and 80% is taxable. The only way around the rule is to first roll the pre-tax funds into an employer plan that accepts incoming rollovers, isolating the after-tax dollars for conversion.

Estimated Tax Payments

A large conversion can create an underpayment penalty if you have not adjusted your withholding or made estimated payments during the year. You generally avoid the penalty if you have paid at least 90% of the current year’s tax or 100% of the prior year’s tax through withholding and estimated payments — 110% if your adjusted gross income exceeds $150,000. Making an estimated payment in the quarter you convert is the cleanest fix.

Surrender Charges and Market Value Adjustments

Before initiating anything, check whether your annuity is still in its surrender period. Most contracts impose declining surrender charges during the first several years of ownership. A typical schedule starts at 7% in year one and drops one percentage point each year, reaching zero in year eight. Those charges come off the top of your distribution and shrink the amount available to convert.

Some fixed and indexed annuities also carry a market value adjustment. An MVA adjusts your account value up or down when you withdraw, surrender, or annuitize before the guarantee period ends. If interest rates have risen since you bought the contract, the MVA typically reduces your payout; if rates have fallen, it may increase it. The formula is required to work symmetrically in both directions.⁵

Ask the insurance company for a current surrender quote before you commit. It will show the exact surrender charge, any MVA, and the net amount that would actually transfer. Waiting a few months until the next contract anniversary can sometimes save you a full percentage point in fees.

Direct Rollover vs. Indirect Rollover

There are two mechanical ways to move the money. The direct method is almost always better.

Direct Rollover

In a direct rollover, the insurance company sends the funds straight to the Roth IRA custodian. You never touch the money. Because the distribution goes directly between institutions, no mandatory 20% federal withholding applies.⁶ Transfers typically complete in two to four weeks, and electronic transfers move faster than paper checks.

Direct trustee-to-trustee transfers are not subject to the one-rollover-per-12-months limit that applies to indirect IRA-to-IRA rollovers. You can do several in the same year.⁶

Indirect Rollover

With an indirect rollover, the insurance company issues a check payable to you. You then have 60 calendar days to deposit the full distribution into a Roth IRA.⁷ This is where people get burned. The insurance company must withhold 20% of the taxable amount before cutting the check. On a $100,000 annuity, you receive $80,000. To complete the rollover of the full $100,000, you have to come up with $20,000 from your own pocket and deposit it along with the $80,000 check within the 60-day window.

If you deposit only the $80,000, the IRS treats the missing $20,000 as a taxable distribution. Under age 59½, that $20,000 could also trigger a 10% early withdrawal penalty.⁷ Miss the 60-day deadline entirely and the full amount becomes a taxable distribution that does not qualify as a rollover.⁶

Take Your RMD First If You’re Old Enough

If you have reached the age when required minimum distributions apply, you have to take your full RMD for the year before converting any remaining balance. RMDs cannot be rolled into any retirement account.⁷ The current RMD starting age is 73 for individuals born between 1951 and 1959, and 75 for those born in 1960 or later.⁸

Roth IRAs have no RMDs during the account owner’s lifetime, which is one of the main reasons people convert. Once the money is in a Roth, it can grow untouched for decades with no forced annual withdrawals.⁸

The Two Five-Year Clocks After You Convert

Roth IRAs come with two separate five-year rules, and conversions interact with both.

The first applies to earnings. To withdraw earnings tax-free and penalty-free, the account must have been open for at least five tax years and you must be at least 59½ (or meet another qualifying exception such as disability or a first-time home purchase). The clock starts on January 1 of the tax year of your first-ever Roth IRA contribution or conversion. A Roth opened in 2024 satisfies the requirement on January 1, 2029.

The second applies to each conversion on its own. If you withdraw converted principal before five years have passed and you are under age 59½, the 10% early withdrawal penalty hits that amount. Each conversion starts its own clock, so a 2026 conversion and a 2028 conversion run independent five-year periods. Once you reach 59½, this per-conversion rule no longer matters.

Your Roth custodian tracks the conversion dates, and Form 8606 is where the numbers land each year you take a distribution that includes converted amounts.

What to Gather Before You Start

Have these on hand before contacting either the insurance company or the Roth IRA custodian:

Annuity contract number, from your annual statement or original documents.
Full legal name and mailing address of the insurance company, which the Roth custodian needs to initiate the transfer.
A current surrender quote showing surrender charges, any MVA, and the net amount that will actually transfer.
Roth IRA account number. Open the Roth first if you do not already have one, since the receiving account must exist before the transfer can process.
The transfer or rollover authorization form from the Roth custodian, specifying full or partial transfer and whether it goes electronically or by check.

Filling those forms out accurately keeps the insurance company from processing the transaction as a standard cash surrender, which would trigger withholding you do not want. Double-check the receiving custodian’s name and account number on the authorization. A misrouted check can push you past the 60-day window if you went the indirect route.

You will see the conversion reflected on three IRS forms after the fact: a 1099-R from the insurance company reporting the distribution, a 5498 from the receiving Roth custodian confirming the deposit, and a Form 8606 that you file with your return to calculate the taxable portion.⁹¹⁰⁴ The 1099-R usually arrives by the end of January and the 5498 by the end of May. Check that both match the conversion you actually completed. Mismatches between these forms and your return are one of the more common reasons the IRS sends a letter.

1
Internal Revenue Service. Topic No. 413, Rollovers From Retirement Plans
2
Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
3
Internal Revenue Service. Federal Income Tax Rates and Brackets
4
Internal Revenue Service. Instructions for Form 8606
5
Interstate Insurance Product Regulation Commission. Additional Standards for Market Value Adjustment Feature Provided Through the General Account
6
Internal Revenue Service. Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
7
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
8
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
9
Internal Revenue Service. Instructions for Forms 1099-R and 5498
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Internal Revenue Service. About Form 5498, IRA Contribution Information